Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Schedule 29 - Registered pension schemes: authorised lump sums—supplementary

Amendment proposed [8 June]: No. 220, in 
schedule 29, page 430, line 41, leave out 'when' and insert 
 'on or after the day on which'.—[Mr. George Osborne.]
 Question again proposed, That the amendment be made.

John McWilliam: I remind the Committee that with this we are discussing the following amendments: No. 225, in
schedule 29, page 433, line 21, after 'scheme', insert 
 'together with interest at a prescribed rate,'.
 No. 226, in 
schedule 29, page 434, line 14, leave out paragraph 7 and insert— 
 '7. (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if— 
 (a) on the nominated date, the value of the member's pension rights does not exceed the commutation limit, 
 (b) it is paid when all or part of the amount which is the individual's lifetime allowance in relation to the member is available, 
 (c) it extinguishes the member's entitlement to benefits under the pension scheme, and 
 (d) it is paid when the member has reached the normal minimum pension age but has not reached the age of 80. 
 (2) The nominated date is any day after the member has reached the normal minimum pension age but has not reached the age of 80 nominated by the member or by the scheme administrator (provided the scheme administrator has given the member at least one month's written notice of the intention to nominate a date and the member has not objected in writing before that date). 
 (3) The commutation limit is 1 per cent. of the standard lifetime allowance on the nominated date. 
 (4) The value of the member's pension rights on the nominated date is the aggregate of— 
 (a) the value of the member's relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and 
 (b) the value of the member's uncrystallised rights on that date (calculated in accordance with paragraph 9).'.

Ruth Kelly: I thank the hon. Member for Tatton (Mr. Osborne) for his exposition of this group of amendments, which is intended to make changes to the lump sum rules in the schedule. Amendment No. 220 involves a minor change to the pension commencement lump sum rules. Pension commencement lump sums may be paid once the
 member has reached minimum pension age, or retires on the ground of ill health. The lump sum rules state that a lump sum is a pension commencement lump sum if
''it is paid when the member has reached normal minimum pension age''.
 The amendment would change ''when'' to ''on or after''. 
 I am going to have to disappoint the hon. Gentleman. I am advised that it is absolutely clear from the pension rules that the term 
''when the member has reached normal minimum pension age''
 will permit the payment of a lump sum once the member has reached minimum pension age and, as provided in the lump sum rules, up until they reach age 75. So, the amendment is unnecessary. 
 Amendment No. 225 would extend the definition of an authorised short service refund lump sum to include in the amount refunded to the member not only a return of the member's contributions, but an element of interest on the contributions. A short service refund lump sum, which is taxable on the scheme administrator, is an authorised payment and including an element of interest in the lump sum refund would make the interest an authorised payment, too. We do not accept that amendment No. 225 is necessary. 
 A short service refund lump sum will arise when a member of an occupational pension scheme receives a refund of his or her pension contributions following a short period of pensionable employment that does not bring a right to pension benefits under pensions law. There is a similar provision in the current regime. It allows for interest to be added to the refund of contributions, but the amount of interest that may be paid is subject to Inland Revenue discretion. Therefore, when a refund of contributions is made that includes interest, both the refund of the contribution and the interest are taxable in the hands of the scheme administrator, who is allowed to make a payment to the member net of the tax already paid. 
 In the new simplified regime, we are codifying the rules on which payments are authorised, so that it is clear what payments can and cannot be made. We accept that a scheme should be able to pay genuine interest at a commercial rate on the refunds. In the new regime, if a scheme makes such a payment, that will be classed as a ''scheme administrator member payment''. Such interest would be taxable on the member at the marginal rate under the normal rules applicable to the payment of interest. Any excess over a commercial amount of interest would be charged as an unauthorised payment. 
 Therefore, the Bill already achieves the effect that amendment No. 225 is intended to achieve in that schemes can include an element of commercial interest in any refund of contributions to the member on account of short service. I do not, therefore, accept that amendment No. 225 is necessary. 
 Before turning to the final amendment, amendment No. 226, I will explain a little of the background to the changes to the trivial commutation rules. The current 
 regime provides for two sets of trivial commutation rules. Occupational schemes may permit commutation of all benefits in respect of the employment, where they do not exceed the value of a pension of £260 per annum. For personal pensions, all the member's benefits in personal pension schemes must be brought together before they can be commuted. Then, if the arrangements do not include protected rights, they can be commuted where the member's fund does not exceed £2,500. 
 In the new regime, we propose a single set of rules. The new rules provide that, where the member's total benefit rights do not exceed 1 per cent. of the lifetime allowance, the member may commute all the benefits within one 12-month period between the age of 60 and 75. 
 Undoubtedly, this is a very tricky issue and the trivial commutation rules provided are based on extensive discussions with the industry. The proposals in the Bill differ from those in the second consultation document, which provided for commutation on a scheme-by-scheme basis rather than on a member basis. That did not receive a favourable response from the pensions industry, which suggested that it would lead to more, rather than fewer, trivial pensions being paid and allow the setting up of multiple schemes providing trivial benefits to strip out capital from pension funds. 
 The approach that we propose is practical. It ensures that administration and scope for abuse are minimised, while recognising the value of commutation for genuine small funds. The new rules will often be more generous than those of the old regime and will allow members greater flexibility in deciding if and when they should commute their pensions. They will, for example, allow a member with a single defined benefits arrangement to commute a benefit of up to £750 per annum, compared with the current limit of £260 per annum. 
 The hon. Member for Tatton raised a point about the pension protection fund levy. The number of members in a scheme is only one of the factors on which the levy may be based. Officials from the Department for Work and Pensions will work closely with the pension protection fund board during the next few months to ensure that issues such as the important one that he raised are taken into account in setting the levy. 
 Amendment No. 226 would, in essence, do two things. First, it would increase the value of the amount that can be commuted on the ground of triviality by allowing such commutations to occur at the age of 50. That age would rise to 55 in 2010. Secondly, it would extend the period in which a member may opt for trivial commutation from one 12-month period between the member's 60th and 75th birthday to a potential period of 25 or 30 years. 
 If we assume real growth of 3.5 per cent., £15,000—the limit that we propose, which is 1 per cent. of the lifetime allowance—at age 50 would be worth about £21,100 by the age of 60, and £15,000 at age 55 would 
 be worth about £17,800 at the age of 60. That means that the potential number of pensions that can be trivially commuted would increase. I accept that that would not have a large tax cost, but it would mean that the cost to the state of providing social security benefits for those who chose to commute their pensions at the age of 50 and who no longer had a pension income would increase significantly. 
 The second effect of the amendment would be to allow trivial commutation at any time between the ages of 50 and 80, rather than in the 12-month window we propose. In discussion with the industry, we came to the conclusion that the record keeping for individuals, their advisers and the Revenue needed for such a long period would be disproportionate to the benefits that extending that window would bring. The one-year window for trivial commutation strikes a balance, in that it offers those with small pensions the opportunity to commute, while removing the need for schemes and individuals to keep comprehensive records about the amounts of capital paid out on the ground of trivial commutation. 
 Given that it would increase the cost of future state benefits and the administrative burden on schemes, I suggest that the hon. Gentleman withdraw his amendment.

George Osborne: What a joy it is, on this sunny day, to be in the Committee Room serving under your chairmanship, Mr. McWilliam. As I said before, there is nowhere we would rather be.
 Amendment No. 220 was a technical, or typographical amendment. The Financial Secretary said that the Inland Revenue has considered the issue and thinks that it is absolutely clear. The pensions lawyers who have talked to me say that it is not. One is right and one is wrong. I think that the lawyers will have their day in court arguing the toss on the issue and will pick up a big fee for doing so. If the Inland Revenue wants to let that happen, so be it. I was just trying to help. 
 Amendment No. 225 is about short service refunds. To be fair—I am in a generous spirit, because my son woke me up at about 5 this morning by jumping on my bed dressed as Buzz Lightyear—

John McWilliam: I thought that that was what children were for.

George Osborne: You seem to have more experience than I do, Mr. McWilliam. I am still learning.
 The Financial Secretary addressed my concern on the short service refund by saying that a scheme administrator member payment would allow schemes to pay interest. There may be some related tax complications because people would end up having to compute their tax liability on what could be small sums of money; the bulk of the tax will be paid by the scheme itself. If I understood the Financial Secretary correctly, the member will be responsible for paying tax on what could be fairly small sums of money, which is the interest earned on the short service pension. I was trying to establish that there would still be an opportunity to receive interest on short service refunds, and she assured me of that. 
 On the more substantive amendment relating to trivial commutation, I was not entirely satisfied with what the Financial Secretary said. She explained the history of it briefly. The idea in the consultation document aroused a lot of criticism from the industry. The Inland Revenue probably spotted that there was a potential tax loophole that people might exploit by setting up a large number of small pensions then commuting them all to avoid tax. However, I am not sure that the new system is better. The Financial Secretary said that the first proposal in the consultation document was not warmly welcomed by the industry. As I am sure she already knows, the new system is not warmly welcomed by the industry either. 
 I have received a large number of representations from the different representative organisations, all of which make one point. The new system is likely to lead to schemes having to administer large numbers of very small pensions. It will not be their fault that someone has used up their 1 per cent. The schemes may end up administering a small pension of 50p a month simply because someone has gone over the 1 per cent. level. I agree that there will not be many such examples. 
 The other, more serious point is that it is the decision of the member to commute, not the decision of the scheme. In some cases, schemes with large numbers of members may have lost track of some, and the members will not be in a position to volunteer to have their pension commuted. One pensions adviser told me that the electricity board apparently has many such pensions from many years ago. The new system will be a big administrative burden for it. 
 Last week, I raised the question of the PPF levy with the Financial Secretary. She made the point that the number of scheme members is only one factor in the calculation of the PPF levy. Nevertheless, it remains a factor in that calculation. It is possible to envisage a scheme that is paying out a pension of 50p a month also paying a £10-a-year levy for administering that pension. Under the current arrangement, someone would be unable to commute what is clearly a trivial sum.

Rob Marris: I am not as familiar with the Bill as the hon. Gentleman. Perhaps he could point out where it specifies that the trivial commutation is the option of the member rather than the scheme. Where in the schedule does it say that?

George Osborne: I am not sure that I can do that as quickly as the hon. Gentleman would like. It may say so in sub-paragraph (3) of paragraph 7. I think that there is also reference to that in line 31 of page 134.

David Laws: Write to him.

George Osborne: I shall write to the hon. Member for Wolverhampton, South-West (Rob Marris), or get someone else to write to him, which, after all, is no more than what the Financial Secretary does. The hon. Gentleman seems satisfied—another satisfied customer.

Rob Marris: I am not satisfied or dissatisfied with the hon. Gentleman. I await with bated breath the letter that he will be writing to me or arranging for someone to write to me.

George Osborne: I will be happy to confirm that point, but I think that I am right.
 The Financial Secretary deployed two arguments: first, that there would be an increase in tax liability, which she accepted would be very small; secondly, and dubiously, that many people could languish on benefits if we agreed to the amendment. That is not a serious argument. I do not believe that the state would expose itself to a huge risk simply by changing the rules on trivial commutation. These are responsible people who probably have a main pension and several smaller pensions. The hon. Lady says that it would significantly increase the cost of benefits, but I would be very interested to see the evidence of that. I suspect that her argument does not stand up to the facts. 
 The Financial Secretary stated that people would need to commute within a year and she made some reasonable arguments for that, but why do people have to wait until they reach the new age barrier of 60 before commuting trivial sums? The Government are raising the minimum retirement age from 50 to 55 in 2010, so why cannot people commute trivial pensions at 55? What is so magical about 60?

Ruth Kelly: I hope that I can reassure the hon. Gentleman about the number of trivial pensions that may be left after a sum has been commuted from a particular scheme. I accept that, in our original consultation document, we put forward a proposal that might have led to the situation that he describes. However, in response to concerns expressed by the industry, we slightly revised the proposal and made the facility for pension scheme members to commute trivial pensions available only to those with pensions with an aggregate capital value of less than 1 per cent. of the lifetime allowance. That, I think, overcomes the point that he raised. People in that position will be able to choose a year falling between their 60th and 75th birthdays in which to commute their trivial pensions.
 The hon. Gentleman raised an interesting point about the pension protection fund levy. As he knows, that is the responsibility of the Department for Work and Pensions, which will work very closely with the pension protection fund. Of course, we will work with them and we will discuss with the industry how the issue should be addressed. It is not a simple issue, as the hon. Gentleman well understands, but we are aware of it and we will work to address it. 
 The hon. Gentleman also asked about the problem of commutation at age 55, which I think I addressed in my opening response. Commutation at that age could significantly increase the value of the pensions commuted and, although there is little tax cost associated with such a move, it could have a major effect on state benefits, particularly on the cost of the pension credit. It is not possible to assess that cost, but I am advised that there could be a significant cost to the Exchequer. 
 The original proposals allowing commutations from age 65 were drawn up to bring commutation into line with the state pension age so that members could assess their total income at 65. In response to 
 industry views we lowered the age from 65 to 60 because many schemes allow members to begin to draw their pensions at that age. Allowing commutations at age 60 was a direct response to industry representations.

John McWilliam: Order. We are all awake this morning, are we not? We have all noticed the misprint on the amendment paper, which would make it appear that we are dealing with schedule 27, not schedule 29: for ''page 420'', read ''page 430''.

George Osborne: I was just testing to see whether anyone would spot that. With your eagle eyes, Mr. McWilliam, you passed the test.
 Much more needs to be done on this area with the industry. Most of the representative bodies have raised the matter with me, and the Financial Secretary herself accepts that there is a particular problem with the pension protection levy. To return to a theme that I was developing last week, that suggests that there has not been much joined-up thinking between the DWP and the Inland Revenue in producing these two pensions measures. However, I shall not press the amendment to a vote but beg to ask leave to withdraw it. 
 Amendment, by leave, withdrawn.

George Osborne: I beg to move amendment No. 348, in
schedule 29, page 430, line 42, leave out from 'satisfied)' to end of line 1 on page 43.

John McWilliam: With this it will be convenient to discuss the following amendments: No. 349, in
schedule 29, page 433, line 3, leave out from 'arrangement' to end of line 4.
 No. 350, in 
schedule 29, page 433, line 18, leave out from 'scheme' to end of line 19.
 No. 351, in 
schedule 29, page 434, line 25, leave out from 'scheme' to end of line 26.
 No. 352, in 
schedule 29, page 435, line 34, leave out from 'scheme' to end of line 35.
 No. 353, in 
schedule 29, page 436, line 14, leave out from 'met)' to end of line 15.
 No. 354, in 
schedule 29, page 436, leave out lines 36 and 37.
 No. 355, in 
schedule 29, page 437, leave out lines 4 and 5.
 No. 356, in 
schedule 29, page 437, leave out lines 29 and 30.
 No. 357, in 
schedule 29, page 438, leave out lines 6 and 7.
 No. 358, in 
schedule 29, page 438, leave out lines 27 and 28.
 No. 359, in 
schedule 29, page 438, leave out lines 34 and 35.
 No. 360, in 
schedule 29, page 440, leave out lines 24 and 25.
 No. 361, in 
schedule 29, page 440, leave out lines 28 and 29.

George Osborne: The amendments are another attempt to remove an ageist Government policy: the rule that prevents lump sums of various kinds from being paid out if a member dies after age 75. In our discussions about lump sums last week with the hon. Member for Yeovil (Mr. Laws)—I am glad to welcome him to his place and look forward to debating his one amendment, which we will come to some time this afternoon—the Financial Secretary described lump sums as popular and attractive elements of the overall pensions regime and, indeed, as one of the reasons that people save in a pension. Of course, the availability of a lump sum on the death of a member is and equally important reason that people like to save in a pension.
 Can the Financial Secretary imagine how much more popular pensions would be if the lump sum could be paid out following the death of the member after the age of 75? My amendments would remove the 75 limit from all kinds of lump sums: ill health, short service, trivial commutation, winding up, lifetime allowance excess and, most importantly, death benefits. I hope that I caught all the 75s when I went through the schedule. However, if I missed a couple, I am sure that, in this spirit of teamwork, the Committee would accept Government amendments that filled in any gaps in my amendments. 
 The point with lump sums is that most of them attract a 35 per cent. tax charge if the member has not reached the age of 75. One of the biggest obstacles to people taking out a pension is the fact that when it is annuitised the pension pot dies with the member, although in some cases a dependant's pension can be paid. The Government partly recognise that. The Bill is striking in that it recognises that people are discouraged from taking out pensions and annuities because they cannot pass on lump sums when they die. That is why it introduces the concept of value-protected annuities, which, in return for the member's taking a reduced income, will allow any remaining pension pot to be paid to the member's dependant—with the tax charge—provided that the member is not over 75. I concede that that measure is likely to be very popular, and my amendments do not seek to remove it from the Bill. 
 Last week, the Financial Secretary brandished her report on annuities. I went away and found a different report to brandish, one produced by the Association of British Insurers. Its research found that 47 per cent. of annuitants would be interested in the option of a value-protected annuity and would be willing to give up a reasonable amount of income for one. In fact, one fifth of those whom the ABI surveyed were prepared to give up 20 per cent. of their annuity income in order to be able to pass on something after their death. However, the problem with value-protected annuities—this welcome new product that the Government will allow to be offered—is that they pay out only if the member is under 75. Why is that? What is the Government's argument for such an arbitrary cut-off? If people want to pass on a pension pot after their death, and they are prepared to have a 
 reduced income while they are alive to pay for that option, they should be free to choose that and the market should be free to provide products that allow it to happen. 
 The Government's basic argument—I am trying to anticipate what the Financial Secretary will say—is that a pension is intended to provide an income in retirement as opposed to passing capital between generations. That is the great issue of principle on which the edifice of the Government argument is built, but it is undermined by much of the Bill. Pension capital can pass between generations, provided that the member dies before their 75th birthday. It is not as though that principle were sacred; it is sacred only for those over the age of 75. 
 People can die before the pension is invested, when the entire tax-free pot is handed over to the next generation or a surviving spouse. If they die after vesting, with an unsecured pension, the entire pension pot is handed over—albeit with a 35 per cent. charge. If they die after vesting with a value-protected annuity, the pot is handed over with a 35 per cent. charge. The principle—to use the Government's word—that capital cannot pass between generations does not apply to those who are unfortunate enough to die before the age of 75. It only becomes a great principle for the Inland Revenue when someone reaches their 75th birthday. 
 The second way in which that principle has been undermined by the Bill is that the provisions do not apply to anyone with an alternatively secured pension. We discussed that at length last week. An alternatively secured income allows money to pass to other generations. Those who were awake last week and have a memory for boring detail will remember the Osborne pension scheme, and the tontine that I described. [Interruption.] I am glad to see that one hon. Member was awake and paying attention. After last week's sitting I reflected on the warning of the hon. Member for Wolverhampton, South-West that this could lead to a ''Kind Hearts and Coronets'' situation, where a member of my family might kill me and other family members in order to get hold of their pension.

Rob Marris: On a point of order, Mr. McWilliam. The Official Report will show that I made no direct mention of the hon. Gentleman's family. I just pointed out the generality of Victorian detective novel plots.

John McWilliam: Order. That is not a point of order. If the hon. Gentleman has a conscience, that is his problem.

George Osborne: I am looking forward to putting those Victorian detective novels on my summer reading list.
 The point is that ASI allows the pension pot to be passed from one generation to another, although the Government are doing what they can to make that option unattractive. We disagree with that. It is worth noting that some of the people to whom I have talked since last week, having read the Committee Hansard, disagree with what the Financial Secretary says about the attractiveness of the ASI option. They think that the industry will take it up, and that many people will go for that option. We shall see. 
 However, we are arguing as to whether there is some great principle that pension pots cannot pass from one generation to another. As I have said, that principle does not apply if one happens to die before the age of 75, if one is a member of the Christian Brethren or if has taken out an ASI for other reasons. The Government seem to be sticking their head in the sand and refusing to budge on the age limit of 75. In effect, they have created a creeping stealth tax because, as life expectancy increases, more people are living beyond 75. I made the point last week that a man now aged 50 has a life expectancy of about 78 years. By 2011, he will have a life expectancy of about 80. According to the Government's own figures, that age will continue to rise.

John McWilliam: Order. The hon. Gentleman cheered me up with that argument last week. He does not need to do it again this week.

George Osborne: I will not continue with that point.
 The point about rising life expectancy is that more and more people will be caught by this invidious rule and, even when they are prepared to take a much-reduced income during their lifetime, they will be prevented from passing on their pension fund. That undermines what the Government are trying to achieve with this package of reforms.

Rob Marris: The hon. Gentleman referred to a creeping stealth tax and cited the average life expectancy of a male as 78. Will he comment on the fact that, mathematically, in the three years from 75 to 78, less income tax would be paid than would be paid under the 35 per cent. arrangement if the lump sum had not been annuitised and had been passed on to another generation? There is no creeping stealth tax: less tax would be paid.

George Osborne: People would lose their entire pot after they were 75. The point is that by sticking with the age limit of 75, the Government will deter people from saving for pensions in the long term. There are people who do not take out pensions and look for alternative savings vehicles because of the 75 rule. It adds significantly to the complexity of the process.

Rob Marris: Would the hon. Gentleman care to produce some evidence that the 75 rule is putting people off saving money in pension schemes?

George Osborne: Yes, I would be very happy to do that. I am surprised that in preparing for the Committee the hon. Gentleman did not read the ABI document ''Annuities: The Consumer Experience''. I am happy to lend him a copy. During our extensive correspondence, I might even give him my copy, because once we are through with this Committee I am not sure that I will need it again.

Howard Flight: My hon. Friend may be aware that when Canada changed the rules for the equivalent of stakeholder pensions and permitted people to choose not to buy an annuity, but to have a pension account with the investments as they wanted them, and to pass the residue on to their heirs, what had been a failure
 became a huge success. Some 70 per cent. of the population participate, unlike in this country.

George Osborne: My hon. Friend, whose knowledge in such areas is unparalleled, reminds me of the Canadian experience, which is good and telling. While I was listening, I found some evidence to quote to the hon. Member for Wolverhampton, South-West. It is from the ABI's commentary on the Bill. It states that the provisions that
''prohibit the return of unused capital once an individual has reached the age of 75''
 introduce 
''further complexity and, as a result, consumers are likely to continue to find it difficult to identify the type of annuity which best meets their individual needs without taking advice.''
 It continues: 
''Removing even more of the complexity''—
 by getting rid of the 75 requirement— 
''will help encourage people to save more for retirement and make pensions simpler to operate for providers and employers.''
 Surely the hon. Gentleman wants to see that. [Interruption.] I suspect that he is about to endorse my view.

Rob Marris: First, the quote that the hon. Gentleman read out is a mere assertion; it does not appear to be based on any survey, although there may be a survey in the document. Secondly, on the previous point, made by the hon. Member for Arundel and South Downs (Mr. Flight), under the Canadian system, with its registered retirement savings plans, which have existed for more than 30 years, there was not a 70 per cent. penetration rate. In addition, the plans are a very different vehicle: they can be cashed in at any age. I cashed mine in my 30s to fund my education.

George Osborne: There is a survey on page 33 of the ABI document. The hon. Gentleman says that the quote is just an assertion, but it is an assertion by the ABI, which has some experience of providing pensions and knows what it is talking about.
 The hon. Gentleman is wasted as a Government Back Bencher. He would be brilliant in opposition: most of an Opposition Member's job involves standing up and talking for a long time. One of the great tragedies of life is that almost by definition he will lose his seat if the Labour party goes into opposition. 
 The point is that the age limit of 75, which prevents people from passing on their pension pot after their death, adds to the complexity of the pension process, deters people from saving, and is inconsistent with the Government's concept of flexible retirement, because it provides a cut-off point and, elsewhere in the Bill, requires people to retire at 75. It is, as I said, ageist. I can see that the Financial Secretary, having listened to my arguments, is convinced.

Ruth Kelly: This is the second day of debate on the radical tax simplification proposals. I feel that several times already we have re-run this debate on whether pension incomes should be secured at age 75, or a pension vehicle should be used more widely as an
 inheritance tax vehicle with all the risks that that would bring with it.
 The amendments seek to raise from 75 to 80 the age at which lump sum benefits can be paid. Having heard the guidance that you offered, Mr. McWilliam, I do not intend to re-run the debate about whether 75 or 80 is the appropriate age at which income should be secured. We had a long enough debate on that during previous sittings. I will say that the amendments wear the clothes of seeking to increase freedom and choice for all. In fact, what they seek to do is ensure that people with very large pension funds are able to build up even greater funds and transform their personal pension schemes into a tax-efficient way of passing capital down through the generations and, if they are fortunate enough to live to the age of 80, of retaining the opportunity to take pension benefits. 
 The hon. Gentleman talks about the attractiveness that the amendment would lead to and creates the impression that there would be far more pension saving if we were to push back the age limit to 80. There is almost no evidence that that would be the case. Changing the age at which pension income should be secured is not the most pressing issue in pensions reform. Most people buy an annuity directly on retirement. Even those who choose to defer purchase their annuity well before the age of 75.

George Osborne: The Financial Secretary talked about the age at which pension needs to be secured. I am talking about the ability to pass lump sums on after death. This is not a re-run of the debate that we had last week. Passing on lump sums is extremely popular. I suggest that, if she has not done so, the hon. Lady reads the ABI report, as it suggests that a large number of people—47 per cent.—are interested in the issue.

Ruth Kelly: I have read that consultation document. The ABI points out that, of those who retired in the last two to three years and purchased an annuity, 95 per cent. did so before the age of 70, so the age ceiling of 75 is clearly not an obstacle for the vast majority of pensioners.
 The industry may think that there is an opportunity to sell value-protected annuities. I do not dispute that the industry has said that that would be a welcome addition to its portfolio. The hon. Gentleman sought to anticipate the debating points that I intend to make, but he did so without seeing the merit in those arguments.

Howard Flight: The Financial Secretary may recollect from previous debates on the matter that there is at least one annuity contract, if not two, offered by insurance companies based in Gibraltar that are expensive but include a facility to pass on lump sums. Those are affordable only by those with larger pensions. The Inland Revenue approves them. Does not she think it unjust that, by paying for such a facility, those with large pension savings can achieve such arrangements, but the many with smaller savings cannot, because it would be too expensive?

Ruth Kelly: The hon. Gentleman's proposals are intended to benefit those with large pension pots. We are debating whether the age of 75 is the right cut-off
 point to secure income. I do not accept the arguments for return of capital after 75.
 As the hon. Member for Tatton has sought to anticipate my argument, I repeat that pension saving is designed to provide an income in retirement to the member, which on death may continue to be paid to any survivors. It is not a route for conserving or preserving capital, regardless of whether it is properly taxed. 
 The hon. Gentleman may ask why we allow the passing on of capital before 75 while a person is in income draw-down. We want to ensure that pensions remain a vehicle for securing an income in retirement in later years, but we recognise that those taking their benefits using income draw-down bear mortality and investment risk. For that reason the rules allow that, when a member dies before 75 having taken benefits but without having secured income, any undrawn funds in the pension fund may be repaid as a capital sum, subject as now to tax at 35 per cent. 
 The hon. Member for Arundel and South Downs draws attention to what I believe is called an open annuity in Gibraltar. I am sorry to disappoint him, but that option will not be available under the new pension tax regime. We operate a principle-based system here. We want people to secure income at the age of 75, and we have based our reforms on maximum simplicity and flexibility for the vast majority of pensioners, but it remains a principle-based system.

George Osborne: It is a funny principle if it applies only when one reaches one's 75th birthday. It is a funny principle if it applies only if one does not take out the option of an alternatively secured income. It was interesting to hear the Financial Secretary mount the standard Government defence of the measure, not least because we have discovered that the open annuities provided in Gibraltar will not be allowed in the future. Perhaps the industry was not aware of that, so we have achieved something in this sitting. It is a point of principle for us that people should be able to pass on lump sums whether they have reached their 75th birthday or not, and for that reason I must press the amendment to a Division.
 Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 11.

Question accordingly negatived. 
 Amendments made: No. 362, in 
schedule 29, page 430, line 42, leave out 'and'.
 No. 363, in 
schedule 29, page 431, line 1, at end insert 
 'and 
 (f) it is not an excluded lump sum (see sub-paragraph (3A)).'.
 No. 364, in 
schedule 29, page 431, line 7, at end insert— 
 '(3A) A lump sum is an excluded lump sum if— 
 (a) the pension in connection with which the member becomes entitled to it is a scheme pension the rate of which is to reduce (or which is to cease to be payable) in accordance with paragraph 2(4)(c) of Schedule 28 when the member becomes entitled to state retirement pension, and 
 (b) the sole or main purpose of making provision for the pension to be such a pension was to increase the member's entitlement to a lump sum on which there is no liability to income tax.'.
 No. 312, in 
schedule 29, page 432, line 45, leave out 
 'amount which is the individual's lifetime allowance in relation to the member' 
 and insert 'member's lifetime allowance'.
 No. 313, in 
schedule 29, page 434, line 22, leave out 
 'amount which is the individual's lifetime allowance in relation to the member' 
 and insert 'member's lifetime allowance'.
 No. 314, in 
schedule 29, page 435, line 31, leave out 
 'amount that is the individual's lifetime allowance in relation to the member' 
 and insert 'member's lifetime allowance'. 
No. 365, in 
schedule 29, page 436, line 19, leave out sub-paragraph (2) and insert— 
 '(2) Where all or part of the member's lifetime allowance is available immediately before a lump sum is paid, sub-paragraph (2A) applies to the lump sum if— 
 (a) its amount exceeds the member's available lifetime allowance, and 
 (b) but for that fact, it would satisfy all the requirements of paragraph 1(1), 4(1), 7(1) or 10(1). 
 (2A) For the purposes of this Schedule, the whole of the lump sum (and not only so much of it as does not exceed the member's available lifetime allowance) is to be treated as paid when all or part of the member's lifetime allowance is available. 
 (2B) But sub-paragraph (2A) does not apply— 
 (a) in the case of a lump sum that would satisfy all the requirements of paragraph 1(1), to so much of it as would be prevented from being a pension commencement lump sum by paragraph 1(2), and 
 (b) in the case of a lump sum that would satisfy all the requirements of paragraph 10(1), to so much of it as would be prevented from being a winding-up lump sum by paragraph 10(2).'. 
No. 366, in 
schedule 29, page 436, line 25, leave out from 'description' to end of line 27.—[Ruth Kelly.]

Ruth Kelly: I beg to move amendment No. 315, in
schedule 29, page 437, line 24, after 'paid' insert 
 'in respect of the pension'.

John McWilliam: With this it will be convenient to discuss Government amendment No. 316.

Ruth Kelly: The amendments give additional clarity to the definitions of two of the death benefit lump sums that may be paid by registered pension schemes: the pension protection lump sum and the annuity protection lump sum. The amount of such lump sums that may be paid out is restricted by any lump sums of the same nature that have previously been paid. The amendments simply add a few words to make it clear that that restriction takes into account only lump sums paid in respect of the same pension or annuity to which the deceased individual was entitled, and not to any other pension or annuity. The amendments provide clarity and certainty for schemes, and I commend them to the Committee.
 Amendment agreed to. 
 Amendment made: No. 316, in 
schedule 29, page 438, line 23, after 'paid' insert 
 'in respect of the pension or annuity'.—[Ruth Kelly.] 
 Schedule 29, as amended, agreed to. 
 Clause 159 ordered to stand part of the Bill.

Clause 160 - Scheme administration member payments

George Osborne: I beg to move amendment No. 269, in
clause 160, page 142, line 24, after 'salaries', insert ', benefits'.

John McWilliam: With this it will be convenient to discuss the following amendments: No. 277, in
clause 169, page 146, line 29, at end insert 'except in prescribed circumstances'. 
No. 276, in 
clause 169, page 146, line 30, after 'salaries', insert ', benefits'.{**W4**}

George Osborne: These are brief amendments. The clause is intended to ensure that a member of the scheme who is also its administrator can be paid, and that such payment would not count as an unauthorised payment. Amendment No. 269 would merely make it clear that payment can include benefits as well as a wage, salary or fee. Amendment No. 276 would apply the same flexibility to clause 169, which defines scheme administration payments. Amendment No. 277 would give additional flexibility by allowing payment of certain types of loan that often form part of an employment package, such as a season ticket or relocation expenses. Again, the amendments were suggested by the industry.
 A more general observation—I suppose that I am straying somewhat into a stand part debate, but I am sure that with some flexibility you will allow it, Mr. McWilliam—is that scheme administration payments could emerge as a loophole. I would be interested to know how the Inland Revenue would deal with that. If someone had exceeded the £1.5 million lifetime allowance, they could pay themselves a salary as a scheme administrator and take out the excess. The Government tried to deal with that by defining a payment as something that a person at arm's length would expect to be paid. However, the salaries of scheme administrators vary considerably, and someone who had been able to accumulate £1.5 million would probably be able to argue that they should be well paid for their advice and expertise. 
 I make that point because I have already heard that advice is being given to individuals who exceed the £1.5 million that they can pay themselves as a scheme administrator. I can see the Inland Revenue trying to deal with the problem several Finance Bills into the future. That is why I flag it up now.

Rob Marris: The hon. Gentleman raises an interesting point, but I am slightly confused by it. The amendments, especially Nos. 269 and 276, would prima facie make the situation worse by including all those benefits. His position seems slightly contradictory. Perhaps he could explain it.

George Osborne: The hon. Gentleman is comparing apples and pears. The main way in which this loophole might emerge is if people have exceeded their £1.5 million allowance and then pay themselves—in monetary terms—funds to reduce their pot to below £1.5 million. What I am saying is that in the normal course of events with small schemes there should be some flexibility so that payments do not necessarily have to be wages or salaries. We will shortly discuss the payment of benefits in kind. That is a relatively new feature of this regime. It should be extended, through my amendment, to clause 160.

Ruth Kelly: Amendment No. 269—and the related amendment No. 276 to clause 169—would allow pension schemes to pay benefits in kind to members involved in pension scheme administration. We do not accept that those amendments are appropriate.
 The clause addresses the fact that registered pension schemes may have occasion to make payments to individuals who are members of the scheme in circumstances where the payment has no connection with the individual's scheme membership. For example, payments might be made to individuals who are employed on administration work for the pension scheme, or to individuals from whom the scheme is purchasing an asset. The hon. Member for Tatton drew attention such examples. The clause enables such payments to be authorised payments, provided they are at a commercial rate. 
 The clause allows schemes to undertake certain normal business transactions without adverse tax consequences. Clause 169 provides similar provisions so that registered schemes can make payments to sponsoring employers without their being taxed as unauthorised payments. We recognise that schemes may need to reimburse the employer for costs borne for the administration or management of the pension scheme. For example, the employer's staff may carry out some administrative duties for the scheme, and the scheme would then need to reimburse the employer for the use of employees' time. The purpose of both clauses is to enable a registered pension scheme to carry out normal commercial business with either the sponsoring employer or a member without those transactions being taxed as unauthorised payments. 
 Amendment No. 269 would allow pension schemes to pay benefits in kind to members involved in pension scheme administration. It is not necessary. A pension scheme can pay benefits without their being taxed as unauthorised payments under clause 162, subsection (2) of which provides that where an asset of a pension 
 scheme is used by a member it is not treated as an unauthorised payment if it is a benefit received by reason of an employment—for example, where an employee is provided with a company car. The amendment's effect is therefore already achieved in the Bill. 
 The clause does not limit the types of reward that an employee can obtain; it merely sets out the more usual ones. If an employee is rewarded for services by some other type of payment—for example, by the provision of luncheon vouchers—such payments will be authorised payments as long as they are commercial in nature. 
 Amendment No. 276 would effect the equivalent change in clause 169(3). Again, it is not necessary. Use of scheme assets by the sponsoring employer would not be a payment, and would therefore not be taxed as an unauthorised payment on the employer. If the benefits are in the form of a transfer of assets, the clause will allow them as authorised payments as long as they are a commercial reward for administrative services. As with clause 160, the definitions in clause 169 are illustrative and do not exclude other commercially valid payments. Therefore, the effect of the amendment is already achieved in the Bill. 
 Amendment No. 277 would provide a power to make regulations with regard to clause 169(3). Those regulations would limit the scope of scheme administrator payments. However, the amendment is deficient in the sense that it does not say who would prescribe the regulations. 
 Clause 169 deals with payments made to the sponsoring employer in the course of administering or managing the scheme—they are called scheme administration employer payments. The clause already allows regulations to be made that further categorise payments as being scheme administration employer payments, or that exclude certain payments from being scheme administration employer payments. We have no current plans to produce regulations under this power; we are simply providing the flexibility to make changes if, in future, different types of payment arise that need to be categorised. 
 Amendment No. 277 merely replicates the existing power to make regulations already provided for in the clause. All three amendments are unnecessary. I urge the hon. Gentleman not to press them.

George Osborne: I am very happy to withdraw an amendment if it is unnecessary, and it has given the opportunity to the Financial Secretary to confirm that what we were trying to achieve can be achieved in any case under the legislation. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 160 ordered to stand part of the Bill.

Clause 161 - Assignment

George Osborne: I beg to move amendment No. 279, in
clause 161, page 142, line 40, after 'provision', insert 'or in prescribed circumstances,'.

John McWilliam: With this it will be convenient to discuss amendment No. 280, in
clause 161, page 143, line 6, after 'provision', insert 'or in prescribed circumstances,'.

George Osborne: The clause ensures that people cannot borrow money secured against their pension, except in the circumstance of a pension sharing order caused by divorce—the term for that is ''assignment.'' It is worth noting in passing that that does not prevent a bank from taking a pension into account when lending money. However, a loan cannot be secured against a pension.
 The amendments are designed to explore a possible problem. As well as pension sharing orders, there are other circumstances in which something akin to an assignment or charge may arise—for example, a charge in favour of the Legal Aid Board or the Child Support Agency. The amendments would ensure that a payment in those circumstances is not caught unexpectedly by the clause by giving the Inland Revenue a power to set out such prescribed circumstances. I suggest that the Financial Secretary grabs the opportunity that I have given her.

Ruth Kelly: Before I respond to the amendments, it would be worth while putting them in context by saying a little about the clause.
 Under the new regime, we will provide tax reliefs—very generous ones—for saving in registered pension schemes. As I have told the Committee on several occasions, we do that with the intention that the tax relief funds be used for a specific purpose: to provide a pension income for a member's life, and for any dependants after the member's death. We have set out clearly in the new regime the sort of authorised payments that schemes can make that fit the purpose behind giving tax relief. Those authorised payments are set out in clauses 150 to 160, which we have discussed. 
 We also need to address the situation in which a registered scheme makes payments that are not consistent with the purpose of giving relief. In the legislation, those payments are called unauthorised payments. In general, an unauthorised payment is any payment made by a registered scheme that falls outside the authorised payments rules. 
 The legislation also provides for unauthorised payments to arise in three specific cases, which are set out at clauses 161 to 163. Clause 161 provides for an unauthorised payment to arise when a scheme member, or a dependant entitled to benefits on the member's death, assigns their pension rights to someone else. They might do this, for example, by assigning their pension to their spouse, or by selling their pension rights for cash to a third party. Clearly, it would be wrong to allow the lifetime allowance charge to be side-stepped in that way or for tax-relieved funds intended to provide an income for life in retirement to be capable of being sold for short-term gain. The clause seeks to discourage such stratagems by treating someone who assigns their benefit rights as having received an unauthorised payment at the time the rights are assigned, of the higher of what they actually received for the assignment or the amount they would 
 have received had the assignment been made on arm's-length terms. The usual tax consequences will apply to such unauthorised payments. 
 We recognise that it is legitimate to assign future benefit rights where a spouse's pension is shared on divorce, and that is specifically provided for in the Bill. The clause excludes such assignments from being treated as unauthorised payments. 
 The amendment is designed to extend the circumstances in which rights to benefits from a registered pension scheme may be assigned. The question whether we should assign pension rights for reasons relating to the Child Support Agency is, perhaps, outside the terms of this debate. Perhaps that is the debate that the hon. Gentleman wishes to conduct. His amendment would provide for assignments in prescribed circumstances, although it does not specify what those circumstances should be.

George Osborne: I want to give the Financial Secretary's officials as much time as possible to come up with an answer to my question.
 There are already circumstances where something akin to an assignment happens and a charge is made, for example, in favour of the Legal Aid Board or the Child Support Agency. I want to ensure that that can continue.

Ruth Kelly: As I said, the amendment provides for assignments in prescribed circumstances, but does not set out what those circumstances should be. That directly conflicts with the intention of the clause, which is to ensure that assignments other than those that are specifically allowed will be treated as unauthorised payments. The clause provides that the assignment of benefit rights is an unauthorised payment, so it effectively determines the time at which the unauthorised payment arises.
 Some have argued that the excluded circumstances for the scheme pension are too narrow and need to include compliance with, for example, a court order, an excess of contribution before bankruptcy, or a pension that is calculated wrongly, and so on. The CBI has made a representation on that. We do not believe that that argument is correct. The amount of pension payable will not be affected by a pension sharing order and will be precluded from being a scheme pension. The pension sharing order affects the person to whom it is transferred. Although a member's pension is generally payable only to a member, an exception is provided for pension sharing orders. 
 We have not received any representations about the points that the hon. Gentleman raises on CSA payments and the Legal Aid Board, but if people make representations to us saying that some legitimate payments would not be allowed under this system, we would listen to them. However, the amendment is technically deficient and would not address his point.

Howard Flight: The amendment is designed to enable circumstances to be prescribed when such events as the Financial Secretary has described arise. Without any
 provision in the Bill, how will the Government be able legally to accommodate such occasions that arise, when the definitions are too narrow to allow it? The point of the reference to prescribed circumstances is to permit eventualities to be dealt with as necessary by secondary legislation.

Ruth Kelly: The hon. Gentleman makes an interesting point. The only circumstance in which that situation arises is on the pension sharing order in divorces. We have had no other representations on that, and we do not think that any argument could be advanced on it. Of course, I assure the hon. Gentleman that I will consider the measure and ensure that the situations that we have identified are comprehensive. However, as I have said to the Committee, this is the only situation that we can identify in which the provision will be necessary. The point made by the hon. Member for Tatton does not deal with the issue that he has raised, so I urge him to withdraw the amendment.

George Osborne: I am glad to hear the Financial Secretary say that she will investigate this point, particularly in relation to the Child Support Agency. We, as constituency Members, do not want to have to deal in a few years' time with all sorts of CSA cases, where, because of some unintended consequence of the Bill, charges cannot be made on pensions, or something akin to assignments cannot be made. Given that she has said that she will investigate the matter further, and will look into whether there are circumstances other than divorce for which we would need flexibility in the Bill, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 317, in 
clause 161, page 142, line 41, leave out 'the member's personal representatives' and insert
'to the member's personal representatives in respect of the member'.
 No. 318, in 
clause 161, page 143, line 7, leave out 'member'.­[Ruth Kelly.]
 Clause 161, as amended, ordered to stand part of the Bill.

Clause 162 - Benefits

Amendments made: No. 319, in 
clause 162, page 143, line 38, leave out 'the' and insert 'a'.
 No. 320, in 
clause 162, page 143, line 38, at end insert­ 
 '(3A) A registered pension scheme is to be treated as having made an unauthorised payment in respect of a member of the pension scheme if after the member's death an asset held for the purposes of the pension scheme is used to provide a benefit (other than a payment) to a person who, at the date of the member's death, was a member of the member's family or household. 
 (3B) The person who receives the benefit is to be treated as having received the unauthorised payment. 
 (3C) If the benefit is received by reason of an employment which is not an excluded employment, subsections (3A) and (3B) do not apply. 
 (3D) If the benefit is received by reason of an excluded employment, subsections (3A) and (3B) only apply if­ 
 (a) paragraphs (a) and (b) of subsection (3) apply, and 
 (b) at the date of the member's death the member, or a member of the member's family or household, was a director of, and had a material interest in, a sponsoring employer.'. 
No. 321, in 
clause 162, page 143, line 39, leave out 'the unauthorised payment' and insert 
 'an unauthorised payment treated as having been made by this section'.­[Ruth Kelly.]
 Question proposed, That the clause, as amended, stand part of the Bill.

George Osborne: I do not intend to speak in many stand part debates, but this is a significant clause, and it is worth drawing the Committee's attention to it and asking the Financial Secretary a couple of questions.
 The clause deals with pension benefits in kind, and ensures that they are subject to tax. The provisions are quite a departure, in that under current rules no, or very few, benefits in kind are allowed; but the clause opens up the possibility of the pension penthouse, the pension Porsche and the pension Picasso, and that is something that people might exploit, in the best sense of the word. 
 First, what will the tax charge be? As I read subsection (4), the charge will either be the same amount that would apply if we were talking about an employee benefit in kind, or 
''may be prescribed by regulations made by the Board of Inland Revenue''.
 That caused me to raise my eyebrows last night. What regulations does the Board of Inland Revenue have in mind? In what circumstances will pension benefits in kind be treated differently from other benefits in kind? Perhaps the Financial Secretary could explain why there is that flexibility in subsection (4), and why paragraph (a) is needed. 
 My second question is broader: what assessment has the Treasury made of the likely take-up of those benefits in kind? The provisions make a substantial change to the investment rules and mean, for example, that pensions can now be invested in residential property. Can we expect large numbers of people to use pensions to buy their homes, and then to pay rent to the pension scheme in order to avoid an unauthorised benefit in kind? Of course, if a scheme buys the home and one pays rent to the scheme, one also avoids inheritance tax. 
 Could the measure thus be used as a form of equity release? People might use their pension pots to buy their homes, and give themselves a large tax-free sum. For example, if one had a pension pot of £100,000, one could use it to buy a house worth £80,000, and suddenly get an £80,000 tax-free sum, provided that one then pays rent to the pension scheme. I make the point because the pension companies that advertise throughout the day on Sky and other channels are already proposing such equity release options. People may find themselves tempted into using their pension to invest in their home. That is not an idle threat: I have already been told of companies in Glasgow that are developing right-to-buy schemes for council properties and encouraging people to use their pension pots to exercise their right to buy. It is 
 important that we are aware of such schemes, and I would be interested to know whether the Treasury is aware of them, and if so, what view it takes. What consumer protection issues exist as a result of them? In short, I want to know whether the Treasury has thought the matter through.

Ruth Kelly: This is the second of three clauses providing for unauthorised payments to arise in specific circumstances. An unauthorised payment is made by a registered pension scheme if the payment does not accord with the Government's intention to provide generous up-front tax relief for pension saving.
 Our intention is that tax-relieved funds are used to provide for an income for life in retirement. The legislation makes it clear what sort of payments a registered pension scheme may make in accordance with that purpose. Where payments are made outside those rules­unauthorised payments­there are tax consequences. 
 Clauses 161 to 163 set out three additional specific circumstances in which unauthorised payments are deemed to arise. Clause 162 deals with cases where the assets of the pension scheme are used to provide a benefit to the member, their family or their household. 
 The new regime will provide tax-favoured pension schemes with a much freer choice over what investments they make. I hope not to anticipate a debate, which I believe we will have later, about whether there should be greater restriction on the use of pension fund assets. We believe that schemes should, as far as possible, be left to decide in the light of market developments their own investment strategy and choice of investment assets. The new, simplified regime significantly reduces the current number of restrictions on the investments that can be held by pension schemes. 
 In the new, simplified regime, a registered pension scheme may invest in an asset that may be used to provide a benefit to a member, their family or household. However, if a benefit is provided in that way, clause 162 deems an unauthorised payment from the scheme to have arisen, and that will attract an income tax charge. The clause provides for the amount of an unauthorised payment of this type to be valued for tax purposes in the same way as amounts under the existing benefits-in-kind tax legislation, which applies where an employee obtains a non-monetary benefit from their employer. It is an integral part of the more flexible approach to investments in the new, simplified regime. 
 The hon. Gentleman called it a Picasso clause and tried to understand the rationale behind schemes investing in works of art or in other assets such as yachts or houses. There may be sound reasons why pension schemes invest in a variety of assets and diversify their investment portfolio. It is a judgment for the scheme trustees or managers to make themselves, bearing in mind the requirement to act in the best interests of the beneficiaries of the scheme and provide pension benefits for members. 
 In the current regime, only certain types of scheme have restrictions placed on the type of asset in which 
 they can invest. A small scheme is not allowed to purchase a work of art, whereas larger schemes are. In the new regime, we want to reduce complexity by applying the same criteria to all registered schemes. That will give schemes the same opportunity to take advantage of potential growth in a wider range of assets. 
 I do not accept that suddenly to start investing in the housing market will prove a particularly attractive option for people who are in small, self-administered schemes. The motivation is not to increase incentives for people to invest in particular forms of equity investment, as the hon. Gentleman said. There are buy-to-let investments and others have mentioned holiday homes in hot spots and different parts of the country. 
 Most pension funds, covering 14 million active members, are free to invest in residential property, and many of them do. The relaxation of the rules covers only those who have self-invested personal pensions and those with small, self-administered schemes. They are specialised products typically taken out only by very wealthy individuals and held by about 200,000 people, compared with the 15 million people who contribute to pensions overall. 
 There are already certain restrictions that make it much less attractive than one might initially think for people holding small self-administered pensions and self-invested personal pensions to invest in property. First, a tax charge will be levied on personal or non-commercial use of the property. For example, if it is a holiday home in Wales or Cornwall, a person using it for their personal use will have to pay a tax charge. Secondly, if they rent out the house on a buy-to-let basis they will be required to put all the rental income secured from the property into the pension fund, which may be unsuitable for people who need the money to fund repaying a mortgage on the property. Thirdly, pension schemes will be allowed to borrow only up to 50 per cent. of the scheme's assets to finance the purchase of a property, so anyone who wants to take advantage of this would have to have 50 per cent. of the assets in cash to put into that property, which would rule out a lot of people in the categories to which the hon. Gentleman referred. Lastly­and this is a huge disincentive­the property will be owned by the pension fund rather than the individual, and in most cases it will need to be sold for income in retirement, and it will definitely need to be sold at the age of 75 in order to buy an annuity. 
 Therefore, the case that has been raised is not likely to be attractive to many people, although there may be some individuals for whom it is an attractive investment to secure income in retirement­which is, of course, the intended purpose of our giving tax relief in the first place.

George Osborne: I mentioned the Picasso and the house in Cornwall­or wherever­but my alarm bells started ringing when I heard that a company in Glasgow was using this to allow people to exercise the
 right to buy council properties. All the disadvantages that the Financial Secretary has set out merely reinforce my concern that people may be led down this route. The flexibility of the pensions regime allows people to transfer out of pensions such as company pensions into specially designed self-invested pension schemes. If it is the case that the market is already coming up with such schemes, I suggest that she at least investigates that and takes a view on what is actually happening, because whatever we debate in this Committee it seems that out in the real world other things are afoot.

Ruth Kelly: When our initial proposals were announced, there was a little flurry of press interest about the possible consequences­and opportunities, for some people­with regard to people buying their own home under the right to buy or buying a second home or holiday home. I think that almost all of that has now evaporated as people have come to realise the disincentives that are built into the system.
 Tax relief is provided for a purpose: to allow people to secure their income in retirement. I do not think that huge numbers of people will suddenly want to exercise the right to buy in this way when they are allowed to borrow only up to 50 per cent. of the value of the property, when they will be taxed if they make personal use of the property, and when they will have to sell the property by the age of 75 at least, if not before then, to secure an income in retirement. 
 I do not know of the particular scheme that the hon. Gentleman mentioned and whether it is still expecting to continue to promote that offer. I would be very surprised if that were possible. Indeed, I would ask whether the company would be mis-selling to that particular category of people. It is not for me to stand here and make judgment. It is more for me to say that the principle behind our tax regime is not to use the tax system to distort investment decisions that are rightly made by the members or trustees of a scheme, and that tax relief should be used to secure an income in retirement. 
 There may be further prudential rules and considerations that mean that others, including the Financial Services Authority or the pension protection board, may well take an interest in these areas. They may well have a view on some of these issues. 
 I stand here as the Minister with responsibility for the taxation of pension funds. To a large degree, we have anticipated later debates on whether the tax system should be used to direct particular investment decisions or whether that task should fall to others. However, I hope that I have made my case clear on this point. 
 Clause 162, as amended, ordered to stand part of the Bill.

Clause 163 - Value shifting

Amendment made: No. 322, in 
clause 163, page 144, line 22, at end insert­ 
 '(1A) But if the event or the change in the value of the currency occurs after the member's death­ 
 (a) the pension scheme is to be treated as having made an unauthorised payment in respect of the member (rather than to the member), and 
 (b) the person who holds the asset or is subject to the liability in relation to which subsection (1)(b) is satisfied is to be treated as having received the unauthorised payment.'.­[Ruth Kelly.]
 Clause 163, as amended, ordered to stand part of the Bill. 
 Clauses 164 and 165 ordered to stand part of the Bill.

Clause 166 - Authorised surplus payment

Question proposed, That the clause stand part of the Bill.

George Osborne: This will be another brief stand part debate. This clause about surplus payments from schemes to employers consists of only one sentence, but it signifies a major change in the law. It says that the rules under which such payments can be made will be ''prescribed by regulations.'' I have not actually seen the regulations; perhaps they were sent to me but got lost in the mound of paper on my desk to do with this Bill, in which case I apologise.
 The change in the clause is significant because, under the current regime, the Inland Revenue actually requires schemes to reduce an excessive surplus. New clauses that were chucked into the Pensions Bill late in the day at Report stage said that the Department for Work and Pensions will make regulations to preclude employers' receiving payments from a defined benefit scheme unless the scheme is funded to a sufficient level to afford a full buy-out; that is, unless annuities and deferred annuities to secure the rights of all members and beneficiaries could be purchased. There are also to be new rules for defined contribution schemes. In other words, the Inland Revenue will no longer be required to approve scheme payments to employers, provided such payments come within the rules. 
 I merely ask the Financial Secretary how much consultation there was with the industry about the new rules. Because of the way in which they were introduced in the Pensions Bill, there was no consultation at all with the industry, but there is a great deal of concern about them. Indeed, it is worth asking the Government how the rules will interact with the new EU directive on pensions. We are now all familiar with EU matters. It is good to see the fourth party of British politics alongside me. [Interruption.] No, I think the results put you behind UKIP. 
 The EU directive on pensions requires schemes at all times to hold sufficient assets to pay out all benefits promised to members. The National Association of Pension Funds suggests that that could cost British pension schemes, which operate on a more flexible approach and are protected from the day-to-day ups and downs of the stock market, up to £300 billion a year. I raise that point under this clause, which is about surplus payments, and I would be interested to hear what the Financial Secretary has to say.

John McWilliam: Order. First, I did not want to interrupt the hon. Gentleman, but of course nobody is
 behind me. Secondly, I remind the Committee that this is a very narrow clause indeed.

Ruth Kelly: Thank you for your guidance, Mr. McWilliam. I hope to keep my remarks to the point.
 The hon. Member for Tatton has no need to apologise for not finding something among the papers on his desk. In fact, it is up to me to apologise to the Committee for not yet having been able to produce draft regulations. However, he often accuses us of lack of joined-up government and not working closely enough with the DWP. On this occasion, my Department is working very closely with the DWP so that, when we do publish the draft regulations describing an authorised surplus payment, they will as far as possible mirror the description given in the regulations accompanying the Pensions Bill. I know that he is familiar with the debate on that issue and that he follows such issues closely. 
 I hope that the issue will be picked up in the debate on the Pensions Bill, as I think that that is the right place for it. I promise that, if it is not debated sufficiently during the Pensions Bill, I will ask my hon. Friend the Minister for Pensions to discuss it with the hon. Gentleman or to write to him setting out the views of the Department for Work and Pensions. 
 While I apologise that it has not been possible to let members of the Committee see draft regulations under the clause, I reassure them that they will be published and consulted on well in advance of the implementation date, which is, as they should be well aware, 6 April 2006. That is well in time for the introduction of the simplified regime. I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 166 ordered to stand part of the Bill. 
 Clause 167 ordered to stand part of the Bill.

Clause 168 - Authorised Employer Loan

George Osborne: I beg to move amendment No. 281, in
clause 168, page 145, line 26, at end insert— 
 '(2) A registered scheme may only make a loan to or in respect of a sponsoring employer if it is an authorised employer loan and the registered scheme is of a description which meets such additional conditions as may be prescribed.'.

John McWilliam: With this it will be convenient to discuss amendment No. 275, in
schedule 30, page 441, line 28, at end insert 
 'or that all the members agree that the charge does not have to take priority over any other charge'.

George Osborne: In the previous debate, the Financial Secretary referred briefly to the fact that the clause will allow schemes to lend up to 50 per cent. of assets to an employer. Actually, I think that she made a different point, which I will come on to, about how much schemes can borrow, but the clause allows schemes to lend up to 50 per cent. of assets to an employer and requires the loan to be secured and repaid within five years at a rate that is the average of the base lending rates of the major high street banks. Those regulations I did receive from the Financial Secretary.
 My first question is: why the change from the consultation document? In that, there is a suggestion that the rate would be 1 per cent. more than the Bank of England's base rate. Why have the Government changed to use an average of the base lending rates of high street banks? 
 Even with those welcome safeguards, is the overall concept a good idea? Is there not a risk to members if a scheme lends 50 per cent. of its assets to an employer? At present, as I understand it, only a small number of schemes can make loans to sponsoring employers. Do we want pension schemes to become a major source of loan finance? If an employer is unable to secure finance on commercial terms, it is probably not in good shape. Is it sensible to have provisions that encourage employers in such difficult circumstances to consider a raid on their pension funds? Is that not exactly what happened with the former Labour MP, Robert Maxwell? How does that interact with the pension protection measures in the Pensions Bill? 
 There may, of course, be circumstances in which doing that is fine. For example, there may be a small, self-administered scheme where there are only a few members and all agree that it is a good idea to make such a loan. However, should not those circumstances be clearly prescribed rather than trying to create a one-size-fits-all approach that would run the risk of employers raiding their pension scheme for large sums of money and putting the members' pensions at risk? Amendment No. 281 would give the Inland Revenue a chance to prescribe the circumstances and restrict such loans to small, self-administered schemes. I have no doubt that the Financial Secretary will accept it. 
 Amendment No. 275 is to schedule 30, which is one that I am sure that all members of the Committee are familiar with. We all know what DLRP over DFY times 100, minus 100, divided by 100, and then times by AO is all about. That formula is just one of many that schedule 30 contains. By the way, one of the general criticisms of the Bill that I touched on at the beginning of our discussions was that there are many complex and unfamiliar formulae in it. I can see the hon. Member for Wolverhampton, South-West is trying to decipher the equation I just mentioned. 
 Most people will accept that, although schedule 30 is long and probably over-complicated, it seems to work—in all but one important respect, that is, and that is where my amendment kicks in. 
 In practice, if an employer has any sort of borrowing arrangements, even overdrafts, it may well be that the borrowing is not only secured by the fixed charge—that is, against a specific asset or assets—but is swept up by a floating charge that covers all assets. Those will almost inevitably be stated to be the first priority. Therefore, it is almost impossible in practice for an employer to satisfy condition C of the schedule, which is 
''that the charge takes priority over any other charge over the assets.''
 Unless condition C is effective, it all seems rather pointless. In part, that goes back to what I asked earlier about the sort of schemes that can lend to an employer. If we are talking about giving the power to smaller schemes, in which all members agree on the risk that comes from a loan, condition C is not really needed. My amendment would go some way to addressing the member protection issues that I raised at the beginning of my remarks.

Howard Flight: May I briefly add comments on amendment No. 281? It has been long accepted that where self-administered schemes invested in premises for the relevant business that employed the members, it was an arrangement for relatively sophisticated entrepreneurs. If the business ended up going down and the pension fund lost money, it was hard luck—those involved were big enough to look after themselves.
 It is not just the idea of a Maxwell situation that worries me. I am concerned that, when a company goes down, perhaps because of macro-economic conditions—globalisation and businesses migrating elsewhere, for example—premises are likely to suffer, too. Therefore, the concept of ''secured'' under the clause does not make the asset at all safe. One could easily have a situation in which the commercial premises could only be disposed of at half the sum that the pension fund lent. The clause seems to permit open-ended lending. The notion that that is safe because of security could open the door to all sorts of nightmares, and we have already seen enough problems relating to the knock-on effects on pension schemes when a company goes down. In the interests of one size fits all, the risks involved in the measure are not worth running. Amendment No. 281 is extremely important, and the Government would be wise to adopt it.

Rob Marris: I am against amendment No. 275. I can foresee a situation in which a small shareholder or director-owned partnership or company—a family business that has been incorporated with limited liability—mortgages everything in sight and still wants more working capital. It might then put up the pension scheme. Under the amendment, all members of the family would then agree to put some of the pension fund capital into their business, which is already up to its neck in debt.
 Broadly speaking, pension schemes with tax relief exist so that people do not face penury in old age. I am giving an example of a desperate gamble in which the money goes into the company. The company may go bust; ergo, the pension scheme will have no money left in it. In that way, it is possible that those members of the scheme who had tax relief when setting up the pension fund, in a sense at the expense of the taxpayer, would still face penury in old age. Arguably, the taxpayer would lose out twice.

George Osborne: Given the hon. Gentleman's concern, is he happy with the clause, which allows substantial loans to be made to employers by pension schemes?

Rob Marris: I shall be guided by you, Mr. McWilliam. I would like to seek reassurance later on that point, when we come to the stand part
 debate. I close my remarks by urging Committee members to vote against amendment No. 275, if it is pushed to a Division.

Ruth Kelly: Clause 168 and schedule 30 provide definitions of one of the types of payment, defined as an authorised employer loan, that a registered pension scheme may make to a sponsoring employer. The ability of a sponsoring employer to borrow money from a pension scheme is seen as a valuable and popular way, particularly for small employers, to raise finance.
 We have received very strong representations from small employers against losing that facility under the new regime. Therefore, like the current tax rules, the new tax rules will allow pension schemes to lend money to employers, but certain safeguards will be built in to protect the integrity of the tax relief that registered schemes will enjoy. 
 As I continue to say, pension schemes are given tax relief to encourage provision for income in retirement. Although the tax rules will allow sponsoring employers commercial access to funds that have been put aside for that purpose, protection mechanisms are needed to ensure that any loans are on commercial terms. The clause therefore sets conditions on the amount that may be loaned in that way, and provides for a minimum interest that must be charged on the loan to be set out in regulations made by the Inland Revenue. It also provides how such loans must be secured, and states the terms under which they are to be repaid. 
 If those conditions are not satisfied in any respect, the loan will be treated as an unauthorised payment, and will be subject to certain tax consequences. However, a scheme may want to invest in stocks, or similar products of the sponsoring employer that are listed on a recognised stock exchange; such investments would not be regarded as loans for the purposes of the clause. 
 Schedule 30 defines the terms used in the clause and explains how the unauthorised payment charge is calculated in circumstances where an employer loan from a registered pension scheme has not satisfied the conditions necessary for it to be regarded as authorised. Clause 168 and schedule 30 allow registered pension schemes to continue to lend money to employers, but provide essential safeguards to ensure that that is done on commercial terms, to protect the integrity of the tax reliefs that registered schemes enjoy. 
 Part of this debate turns, yet again, on the purposes of the tax rules and the Department for Work and Pensions rules with regard to safeguarding people's pensions. We argue that the tax rules are there not to distort investment decision making but to facilitate legitimate investment choices, while ensuring that any tax loopholes are avoided and that the fund operates in an appropriate way. Having said that, the DWP has a role in member protection, so it deals with members on most occupational schemes and bans loans for employers. From a prudential point of view, the DWP has a very strong line in protecting members' interests. It is right that that is where the argument takes place 
 and that it is in its capacity as a safeguard of members' pensions that the rules are made. 
 The tax rules are a limit for those in schemes not covered by the Department for Work and Pensions. Small schemes, for which members are trustees, are one example of schemes not covered by DWP rules—they currently have the facility to borrow against their pension fund to finance business developments. We did not want to see that right taken away and, as I said, small businesses made strong representations on that point. However, we have built in safeguards.

Howard Flight: The Minister seems to be saying that the DWP rules will prevent the sort of risks to which I referred. There is probably general agreement that small, self-administered schemes have always interacted, and entrepreneurs are big enough to take the risk, but can she assure the Committee that the DWP rules in relation to employees and their pension schemes effectively rule out putting the pension money at risk?

Rob Marris: On a point of order, Mr. McWilliam. With the greatest respect to you, it seems to me—humbly sitting here—that we are drifting into a stand part debate on the main clause. I seek your guidance, because I wish to contribute to such a debate, but I would not like the amendments to be dealt with and then for you to rule that we have already had a clause stand part debate.

John McWilliam: The hon. Gentleman points to a real difficulty, because we are drifting in the way that he suggests. One of the problems is the way in which the amendments are grouped. Schedule 30 is attached to the clause, but it is not the only schedule that is attached to it. Therefore, this is not a case when I could argue that we should take the schedule and the clause together. One of the difficulties is that we are drifting wide of the amendments, and I should caution hon. Members to return to the point of the amendments. Finally, I can tell the Committee that this has been a difficult period for me: as the former chairman of the quite substantial Edinburgh Corporation pension fund, keeping my mouth shut on such matters is extremely difficult.

Ruth Kelly: Let me turn my attention to the amendments that we are discussing. Amendment No. 275 would alter one of the conditions that the clause applies to a loan in order that it meets acceptable commercial criteria. One of the main conditions applied to loans is that they are fully secured. That is a prudential measure intended to safeguard the funds of a pension scheme that has enjoyed substantial and generous tax reliefs. Most commercial loans will be secured on the borrower's assets, and the clause and schedule 30 will replicate that for loans made by registered schemes by providing that the loans need to be secured as a first charge on assets at least equal to the value of the loan.
 Amendment No. 275 would provide that if the members of a registered scheme agree that the loan shall no longer be a first charge on assets, an unauthorised payment will not apply. Many pension schemes are controlled by trustees who are also the scheme members and the people who control the 
 sponsoring employer. In those circumstances, there are increased possibilities that loans will be made in uncommercial circumstances. For example, loans could be made to prop up an ailing employer with large debts and few assets. Therefore, it is precisely for the schemes where all members may agree to waive the requirement for a first charge on assets where the need for the requirement is greater. The requirement provides that a normal commercial condition for business loans is provided on loans from pension schemes. It ensures that loans are made on prudential commercial terms and safeguards the generous tax reliefs that are given to pension schemes. 
 Amendment No. 281 would introduce a new subsection at the beginning of clause 168 to provide that a registered scheme may only make an authorised employer loan. It also gives a power to lay regulations prescribing what type of scheme may make an authorised loan. It is not our intention to prescribe the kinds of scheme that can or cannot make loans and I hope that I have reassured the hon. Member for Arundel and South Downs that the sorts of loans that he is worried about will be covered by DWP rules. 
 The rules on authorised employer loans set clear criteria defining the type of commercial loan that a scheme can make: the loan must be for a maximum of five years; it must not take up more than 50 per cent. of the scheme's assets; it must provide for regular payments of interest and capital; and the rate of interest must meet the required rate and it must be fully secured. Those conditions will ensure that loans provided by pension schemes to connected employers are made on prudential, commercial terms. Therefore, we see no reason to provide for further limitations on the type of scheme that is allowed to make such loans. 
 The amendment also proposes that registered schemes can only make an authorised loan to a sponsoring employer. That is what the legislation already provides for, and any other loan will be taxed as an unauthorised payment. I urge the Committee not to accept the amendment.

George Osborne: On amendment No. 275, the point about getting the agreement of all members is that in practice it would achieve what the Financial Secretary is seeking: it would be something that only a small scheme could achieve. A large scheme could not do it. The flexibility that exists for small schemes would continue.
 On the other amendment, I hear what the Financial Secretary is saying. She has said that it is not an issue for the Inland Revenue any more, but for the Department for Work and Pensions. That is part of the shift away from the system of tax approval to a system of registration, and the Inland Revenue will take on less of the policing functions. That raises the question from the earlier debate as to why there is a requirement for schemes with fewer than 50 members to purchase annuities in the Inland Revenue's legislation, but that question is for another day. 
 I am glad that I received the Financial Secretary's written response—a week late—yesterday. We shall have to see whether my concerns and those of my hon. Friend the Member for Arundel and South Downs are met, as well as the concern that people's pensions will be put at risk by schemes lending large sums of money to ailing employers. We shall see whether those concerns are met by the DWP regulations, but given what the Financial Secretary has said, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Rob Marris: I have two questions for the Financial Secretary. Clause 140(6) defines ''sponsoring employer'', a term used in the first line of clause 168 and in the debate today. It is a very opaque definition, but as far as I can tell, it would exclude a small business that is a partnership where equity partners are not employed by the organisation, but own it, in contradistinction to employees, or salary partners who are employees.
 My second question is more broadly related to the clause. The Financial Secretary said earlier—I shall paraphrase her, and I hope she will forgive me and clarify the point if I get it wrong—that such a facility already exists and is popular with small businesses, but the clause is part of a process of tightening the rules. If I have understood her correctly, that suggests that there are problems. Otherwise, the existing rules would not need tightening. I would like her to clarify what the problems have been and the way in which clause 168 and, when we come on to it, schedule 30, address those problems. I am wary, as the hon. Member for Tatton said, about a Maxwell-type situation, which this has a whiff of to me.

Ruth Kelly: First, let me address the point about the overall purpose of the clause. The debate concerns the purpose of tax rules in this situation and the purpose of DWP rules in governing the sorts of investment that a pension scheme can make. It is not the purpose of tax legislation to prescribe the sort of loans or investments that a particular pension scheme can make. In the new simplified regime, we have swept away all the investment rules and the other previous restrictions on the sort of investments that have taken place, and tried to level up the playing the field with one set of standard rules that apply across the board in other areas, including loans that can be made to a sponsoring employer.
 We had a choice. Should we, in the tax legislation, fan the flame of what we have been told is a valuable source of business finance for small firms? We made a clear choice about whether we should use tax legislation to prescribe a certain type of behaviour. It is the purpose of the tax rules to facilitate such choices, while safeguarding revenue for the Exchequer. We try to ensure that we have as liberal a regime as possible, but with strict enough safeguards to ensure that there will not be incentives to use a pension fund on non-commercial terms, so that the Exchequer regains the tax relief, or to ensure that the relief is used for the 
 purpose of securing an income in retirement because it has been granted for that purpose.

Rob Marris: I understand the Financial Secretary's line of argument, but it slightly surprises me that in line 29 on page 145, in subsection (1)(a), a 50 per cent. limit is included. If it is the Treasury's view that it is not for it—although it may be for the Department for Work and Pensions or the Department of Trade and Industry—to prescribe the sorts of investments that are made, why has the 50 per cent. limit been included?

Ruth Kelly: The safeguards that we have included are to ensure that the loans are, as far as possible, made on commercial terms. As I have consistently said, employers' contributions to registered pension schemes qualify for tax relief because they will be set aside to provide retirement provision for members. However, it would not be a prudent use of schemes' money to invest it all in loans to one person. Excessive lending could lead to liquidity problems for the scheme, for example if there was a sudden and unexpected call to provide scheme benefits. We think that 50 per cent. strikes a reasonable balance, protects the assets to ensure that there are sufficient funds to provide income on retirement, and so deals with calls on the Exchequer.
 The current regime is policed at the discretion of the Inland Revenue. As part of that, any loan must be made on commercial grounds. Although there is no specific requirement for security, if security would be insisted on by all commercial lenders, it is part of those commercial grounds. However, in general the Revenue does not insist on having security for loans. Experience has shown that that has led to many such loans being 
 lost as employers go into liquidation. It is sensible and proportionate to insist that loans involving sponsoring employers are fully secured. The vast majority of commercial lenders would insist on security being applied to commercial loans granted to companies. 
 My hon. Friend asked what sorts of risks would arise if the safeguards were not built into the system. I am sure that most members of the Committee understand the nature of the risks involved for small companies with small schemes and the temptation that there is to draw on those funds to support the business. It is precisely for those reasons that we have built the tax safeguards into the system. He and others may think that there is a case for tougher prudential rules, but again that falls more under the remit of those dealing with the rules in the Department for Work and Pensions, than under the tax system. On those grounds, we think that a liberal regime, with sensible commercial safeguards built into it, is the right way forward.

Rob Marris: I am reassured by the Financial Secretary's comments.
 Question put and agreed to. 
 Clause 168 ordered to stand part of the Bill. 
 Schedule 30 agreed to. 
 Clauses 169 and 170 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-four minutes past Eleven o'clock till this day at half-past Two o'clock.